I have investors ask me every week to send them information on the “good’ deals.  You know, the deals where they can buy properties substantially below replacement cost, with an 9%-10% cap rate and 10% cash on cash returns.  After all, there must be a lot of properties that banks have foreclosed on and want to dispose of at bargain prices just to get them off their books.

Wrong.

This is not 1989-1994 where there was an RTC to force banks to take action when loans are delinquent.  Banks are not foreclosing.  There are really very few REO properties banks are trying to sell.  Investors are holding on to their cash waiting for the opportunities that I don’t think will ever materialize.

There as an article in the Wall Street Journal yesterday that illustrates this point completely.  It is about “Distressed Property” funds.  Private equity funds formed by the major investment banks to take advantage of the great bargains that were going to emerge in commercial and multifamily properties.  Those funds are returning billions of dollars to investors because there are no properties to buy that meet the investment criteria.

Some real-estate funds, which raised billions of dollars hoping to pounce on bargain properties, are returning money to investors after finding slim pickings, as many banks avoid dumping property by extending and restructuring loans.

A slew of private-equity funds, including ones run by Morgan Stanley, Rockpoint Group LLC and Chicago developer John Buck’s firm, have taken the unusual step of allowing investors to exit their funding commitments when the funds’ investment period expired. A total of 19 private-equity real-estate funds have either returned or plan to return more than $6 billion of capital to investors, said Real Estate Alert, a trade publication. Others have sought to extend their investment periods or change their investment mandates in light of the short supply.

The private-equity refunds highlight a supply-demand imbalance in the commercial real-estate industry. Investors have accumulated billions of dollars to look for returns in the down-on-its-luck market for office, retail stores, hotels and other commercial property. But not too many properties are for sale, as many real-estate owners are holding onto assets in hopes of a stronger rebound. Property owners have benefited from low interest rates, which keep loan payments low, and banks’ reluctance to sell troubled loans.

“Funds are fighting over a slim group of available deals,” said Mark Edelstein, head of the real-estate group at law firm Morrison & Foester LLP.

When the recession hit and commercial real estate appeared to be heading for a cliff, funds raised billions of dollars with hopes of repeating what investors like Sam Zell did during the real-estate collapse of the early 1990s.

Those investors bought assets from banks that were under pressure from regulators to take write-offs and sell troubled loans. When those assets soared in value later in the decade, they profited handsomely.

These days, however, many lenders, especially community and regional banks, have been restructuring loans at fast clips, partly encouraged by federal guidelines issued last year that give banks more leeway to modify loans to avoid bigger losses. They are avoiding selling troubled assets, hoping to earn their way out of trouble. In the meantime, inventory remains low.

Another instance:

In another case of refunds, a $480 million high-yield debt fund managed by Rockpoint called only $24 million of the committed capital to invest in three deals involving residential developments. The remaining commitments were released to investors. In addition, the John Buck Co. returned $40 million unused commitments to a $65 million fund it launched in 2008.

“We spent a great deal of time trying to find prudent investments,” said Charles Beaver, a principal at John Buck. But “there was a disconnect between the pricing that was in the market and the return you expected to receive,” he said.

Exactly right.  We are in a marketplace of disequilibrium right now.  There is an oversupply of capital available for buying properties and a shortage of available properties to buy.  This disequilibrium tends to keep prices higher than one might expect during this market.  This is particularly true in the multifamily properties.  There are almost no properties on the market that are “steals.”  There are some deals that are better than they were three years ago, but at least in California, you are still seeing apartment properties selling a less than 6% cap rates.  Why?  Because investors are still buying them at those rates because of the scarcity of product.

In my view, it is not likely we will see 8%-9% cap rates in quality apartment properties in California anytime in the near future.  Unless we start to see an abundance of properties coming on the market, cap rates will continue to stay low because of the supply-demand disequilibrium.

Lenders are willing to wait the market out rather than foreclose and liquidate in this market.  “Pretend and Extend” is the current MO of lenders.  In the early ’90s the Resolution Trust Corporation forced lenders to foreclose and liquidate.  There is no comparable agency today.  That being the case we will likely not see properties start to sell until buyers reduce their expectations and increase their offers.

Meanwhile savvy buyers are positioning themselves now with reasonable buys and taking a long-term view.  There is a move to safety and security and away from high risk properties.  This past week an office building in the Seattle area sold for $531 a square foot, for a total of $310 Million.  Why did it sell for such a high price?  Because it is leased to Microsoft.  Low risk, quality product.

Those investors waiting for the “good” deals are likely to find they missed the market.